Sample Chapter

What Do Schoolteachers and Sumo Wrestlers Have in Common?

Imagine for a moment that you are the manager of a day-care center. You
have a clearly stated policy that children are supposed to be picked up
by 4 P.M. But very often parents are late. The result: at
day's end, you have some anxious children and at least one teacher who
must wait around for the parents to arrive. What to do?

A pair of economists who heard of this dilemma—it turned out to be
a rather common one—offered a solution: fine the tardy parents.
Why, after all, should the day-care center take care of these kids for
free?

The economists decided to test their solution by conducting a study of
ten day-care centers in Haifa, Israel. The study lasted twenty weeks,
but the fine was not introduced immediately. For the first four weeks,
the economists simply kept track of the number of parents who came late;
there were, on average, eight late pickups per week per day-care center.
In the fifth week, the fine was enacted. It was announced that any
parent arriving more than ten minutes late would pay $3 per child for
each incident. The fee would be added to the parents' monthly bill,
which was roughly $380.

After the fine was enacted, the number of late pickups promptly went . .
. up. Before long there were twenty late pickups per week, more than
double the original average. The incentive had plainly backfired.

Economics is, at root, the study of incentives: how people get what they
want, or need, especially when other people want or need the same thing.
Economists love incentives. They love to dream them up and enact them,
study them and tinker with them. The typical economist believes the
world has not yet invented a problem that he cannot fix if given a free
hand to design the proper incentive scheme. His solution may not always
be pretty—it may involve coercion or exorbitant penalties or the
violation of civil liberties—but the original problem, rest
assured, will be fixed. An incentive is a bullet, a lever, a key: an
often tiny object with astonishing power to change a situation.

We all learn to respond to incentives, negative and positive, from the
outset of life. If you toddle over to the hot stove and touch it, you
burn a finger. But if you bring home straight A's from school, you get a
new bike. If you are spotted picking your nose in class, you get
ridiculed. But if you make the basketball team, you move up the social
ladder. If you break curfew, you get grounded. But if you ace your SATs,
you get to go to a good college. If you flunk out of law school, you
have to go to work at your father's insurance company. But if you
perform so well that a rival company comes calling, you become a vice
president and no longer have to work for your father. If you become so
excited about your new vice president job that you drive home at eighty
mph, you get pulled over by the police and fined $100. But if you hit
your sales projections and collect a year-end bonus, you not only aren't
worried about the $100 ticket but can also afford to buy that Viking
range you've always wanted—and on which your toddler can now burn
her own finger.

An incentive is simply a means of urging people to do more of a good
thing and less of a bad thing. But most incentives don't come about
organically. Someone—an economist or a politician or a
parent—has to invent them. Your three-year-old eats all her
vegetables for a week? She wins a trip to the toy store. A big
steelmaker belches too much smoke into the air? The company is fined for
each cubic foot of pollutants over the legal limit. Too many Americans
aren't paying their share of income tax? It was the economist Milton
Friedman who helped come up with a solution to this one: automatic tax
withholding from employees' paychecks.

There are three basic flavors of incentive: economic, social, and moral.
Very often a single incentive scheme will include all three varieties.
Think about the anti-smoking campaign of recent years. The addition of a
$3-per-pack "sin tax" is a strong economic incentive against buying
cigarettes. The banning of cigarettes in restaurants and bars is a
powerful social incentive. And when the U.S. government asserts that
terrorists raise money by selling black-market cigarettes, that acts as
a rather jarring moral incentive.

Some of the most compelling incentives yet invented have been put in
place to deter crime. Considering this fact, it might be worthwhile to
take a familiar question—why is there so much crime in modern
society?—and stand it on its head: why isn't there a lot more
crime?

After all, every one of us regularly passes up opportunities to maim,
steal, and defraud. The chance of going to jail—thereby losing
your job, your house, and your freedom, all of which are essentially
economic penalties—is certainly a strong incentive. But when it
comes to crime, people also respond to moral incentives (they don't want
to do something they consider wrong) and social incentives (they don't
want to be seen by others as doing something wrong). For certain types
of misbehavior, social incentives are terribly powerful. In an echo of
Hester Prynne's scarlet letter, many American cities now fight
prostitution with a "shaming" offensive, posting pictures of convicted
johns (and prostitutes) on websites or on local-access television. Which
is a more horrifying deterrent: a $500 fine for soliciting a prostitute
or the thought of your friends and family ogling you on
www.HookersAndJohns.com?

So through a complicated, haphazard, and constantly readjusted web of
economic, social, and moral incentives, modern society does its best to
militate against crime. Some people would argue that we don't do a very
good job. But . . .